Best Reasons To Get A Personal Loan (And When To Avoid It)

A personal loan can help you cover a host of expenses, from mortgage payments to college tuition and medical bills. Should you ever find that a few extra dollars would come in handy quickly, a personal loan may be a good option, especially if you’re in need of cash fast.

Let’s take a closer look at different types of personal loans and if you should consider applying for one. You may be surprised at just how common and helpful a personal loan can be.

What Are Personal Loans?

One personal loan definition is a form of unsecured installment loan that is granted by a financial institution (bank, credit union, etc.) to an approved borrower. Under the terms of a personal loan agreement, you’ll agree to repay any sums lent over a fixed timeline, typically spanning a range of 2 – 5 years. Because these are typically unsecured loans, you will not have to put up collateral assets (like your car or a home) to secure the loan like you would for an auto loan or mortgage.

How much you can expect to pay in interest on a personal loan varies by your individual credit score, credit history and lender. Nonetheless, under the terms of most personal loans, the annual percentage rate (APR) will be fixed for the duration of the loan. In other words, you won’t have to worry about jumps in interest rates.

How Do Personal Loans Work?

Anyone wishing to obtain a personal loan will need to apply for the loan with, and be qualified to receive one by, a financial lender. As part of the application process, lenders will review your credit score, credit history, debt-to-income ratio (DTI) and other factors such as your current income and expenses.

What Can Personal Loans Be Used For?

From emergency expenses to rising costs of living, many good reasons exist to look into the possibility of obtaining a personal loan. Reasons for seeking a loan out will vary from person to person and family to family, with millions of individuals looking to personal loans to help improve their budget and cash flow every year. Here are a few of the top things that personal loans can be used for:

Debt Consolidation

Personal loans are often used to aid debt consolidation. Personal loans can be used to help roll multiple debts up into a single payment, or help pay down credit card debt. Personal loans tend to come with lower interest rates than other forms of debt, and by consolidating multiple debt payments you can minimize the hassle of juggling multiple loans and payment schedules. Likewise, they can also help you refinance pricier debt down to a lower rate, thereby helping you lower your monthly payments.

Expensive Purchases Or Life Events

Weddings, honeymoons, vacations, car expenses and other major purchases can all put a big dent in your budget. After all, cars are notorious for breaking down when you least expect it, and repairs can cost a pretty penny. Likewise, because you’re often hosting and catering for dozens of friends and loved ones, wedding expenses can quickly add up, as can the total bill for taking a family holiday. Personal loans can help you fund life’s pricier occasions.

Personal Investments

Investing in yourself can be a great investment with the possibility for extraordinary returns. Starting a small business, going back to school or obtaining a new certification to earn additional income or a higher salary are all popular ways to invest in your future self.

Home Improvements

A personal loan can also help you pay for a host of new home improvements. For example, if you are considering remodeling your kitchen, putting a pool in your backyard or landscaping the front lawn, you might consider taking out a personal loan. Such a loan would normally be unsecured in nature – and may prove to be a better choice than a home equity loan or home equity line of credit (HELOC), as it doesn’t require you to put your home down as collateral.

Unexpected Emergencies

Emergencies happen and, unfortunately, often come with high price tags attached. Such emergency-related expenses may come in the form of medical bills, funeral costs or even costs for pet-related care. Ask yourself: When was the last time you saw a sprained ankle or dog or cat with a sick tummy coming in advance? These incidents can be hard to predict, and even harder on your pocketbook – thankfully, a personal loan can be a huge help when it comes to covering unforeseen doctor or vet bills.

How To Apply For A Personal Loan

It’s often easier than you think to apply for a personal loan, which is typically provided by a bank, credit union or online lender. Often your hardest task will simply be picking the right loan package and lending partner for yourself. Here are simple steps to follow to apply for a personal loan:

1. Research Your Options And Prequalify For A Loan

Individual lenders vary in how much money they’re willing to lend to borrowers and on what terms. That’s why it’s important to shop around and get a feel for what types of offers different lenders might extend to you. As part of your research, it's common to compare options from three to four (or more) providers to determine the best APR, loan terms and loan amount for you. Seeing what you can prequalify for will help you decide. Having done your homework, you’ll be far better prepared to pick the right personal loan package and partner for you.

2. Gather And Submit Documents

Once you have decided on a lender and specific loan product, you’ll need to formally apply for a personal loan as a borrower. That means demonstrating your creditworthiness and qualifying with your chosen lender. Prior to loan application, take time to gather financial documents such as pay stubs, bank statements, information on investment holdings and details on your employment. Lenders prefer borrowers with a strong credit history, good credit score and enough regular income to maximize odds that the loan will be repaid in a timely fashion. Further, the stronger your credit score, the more likely you’ll receive a better offer or lower interest rate on any loan extended. You can easily use Rocket Money^℠ to check your credit history and gain insight as to how you might improve it based on major credit factors.

3. Receive Personal Loan

Congratulations! After your application has been approved, you’ll be ready to receive any sums that you’ve been cleared to borrow. Any loaned monies should be transferred to you within the next few days, or possibly even the same day, depending on your individual lender. Add your new loan payment to your budget and set up automatic payments to make sure you don't miss a payment.

Personal Loan FAQs

What are the pros and cons of a personal loan?

When you get a personal loan, the loan terms usually specify that you'll get one lump sum — this can be more useful in some situations than something like a line of credit. Personal loans can also be a great tool for debt consolidation, since the interest rate on most personal loans is often lower than that of most credit cards. Plus, you can simplify your life by only having one monthly payment.

On the downside, it may be more challenging to be approved for a personal loan than a credit card or other type of debt. Also, because a personal loan must be paid off by the end of the term, your payments might be higher than the minimum monthly payment on a credit card.

What credit score do you need to qualify for a personal loan?

The credit score you need to qualify for a personal loan will depend on the lender that you have chosen. Your credit score and other financial information will also determine the loan terms that you will qualify for. Generally speaking, the better your credit score and financial information, the lower the interest rate you can qualify for.

What should I not use my personal loan for?

Remember that a personal loan is debt that goes on your credit report and must be repaid. So while there are valid and good uses for a personal loan, there are some things that you shouldn't use a personal loan for. This includes things like unnecessary expenses, investments or down payments for a mortgage.

What’s the difference between a loan and a personal loan?

The Bottom Line: There Are Many Benefits To Using A Personal Loan

Life is full of unexpected surprises. Important moments like getting married, making a new car purchase, starting a new business or sending a loved one off to college usually require a big investment. Naturally, a little extra cash can come in handy during these joyous situations or in less happy times, like when unexpected medical, auto or pet-related emergencies strike.

A personal loan, which allows you to borrow money from a financial institution under set terms and interest rates, can help provide the cash that you need to cover these expenses and more. In return for receiving these sums, you agree to pay back any monies lent plus interest over the course of a fixed period (generally 2 – 5 years or so) in the form of regular, recurring (typically monthly) payments.

If you are considering a personal loan or want to learn more about how to improve your credit, start  managing your finances with Rocket Money today.